Budgeting 101: Tips for Creating a Realistic Budget

Building a budget is the most effective way to manage your finances and prevent overspending. With a budget, you can predict your monthly spending habits and plan accordingly to cover your bills while having enough left over for existing debt payments or savings. Unfortunately, many people don’t budget and spend more than they earn without realizing it. If you’ve ever looked at your bank account and been shocked to see how much you spent in a month, you need a budget that provides you with a clear action plan for spending your money every month. Here are a few tips for creating a realistic budget:

Know Your Monthly Income

Most people know their salaries or how much they earn per hour. However, they don’t look at their pay stubs to determine how much money they bring home after taxes. Your net income is crucial when building a budget because it tells you exactly how much money is deposited into your bank account each month, and knowing exactly what you bring home can help you determine how much money you have on hand. 

If you have a W-2 job, finding this information should be easy. You should receive digital or paper pay stubs from your employer for each pay period that tells you your take-home pay. However, taxes aren’t taken from your income if you’re a freelancer or small business owner. Therefore, you may have to do additional math to determine how much you take home after taxes. You can talk to your accountant to determine your tax bracket and self-employment tax based on how much you make during the month. 

Add Up Your Expenses

There are two types of expenses: fixed and variable. Your fixed expenses are what you spend money on every month, and the amount you spend doesn’t change. For example, your rent payments will stay the same for 12 months if you’ve signed a one-year lease. In contrast, your variable expenses are the costs that change from month to month, such as credit card payments, utility bills, and groceries. 

Determining your fixed expenses is easy because you know exactly how much you spend every month. However, calculating your variable costs is much more challenging, especially if you use multiple credit and debit cards to pay for them. First, review your bank statements to find your variable costs and add them up for 12 months. This value is how much you spend on variable expenses per year. Then, to get your monthly costs, divide that number by 12 to give you an average monthly value. 


Once you know your monthly expenses, subtract them from your net income to see how much you have left over after paying all your bills. Then, allocate the remaining amount into wants and savings. You can have multiple different goals and accounts to help you separate your funds and send money back and forth between them when necessary. For example, you might have a savings account dedicated to emergencies or funding a large purchase and a retirement account. 

Set Goals

When allocating your budget, setting realistic goals for yourself is crucial. First, consider the reason why you want to save money. Maybe you want to purchase a house within the next ten years or go back to school. Or perhaps you want to diversify your portfolio with a precious metals IRA. Whatever the case, you have money goals, and it’s essential to build your budget around them. 

Track and Monitor Progress

After creating your budget, you should continue monitoring your progress monthly and determine whether you’re holding yourself accountable. It’s easy to start a reasonable budget and fall behind again, so you should dedicate time every so often to tracking your progress, including your income and expenses, to help you plan. 

Tracking your progress can also enable you to re-evaluate your goals. As you get older, your money goals might change. For example, if you decide to start a family, your goals might change from saving money for a new car to saving for a house. As your goals change, you must make changes to your budget and review your spending to ensure your habits won’t get in the way of achieving those goals. 

Review Expenses Regularly

When creating a budget, you should understand your expenses and where all your money goes. However, things change over time, so you may get new bills or pay off old debts, which will impact how much money you spend throughout the month. Therefore, plan to review your monthly expenses to determine improvement areas. For example, if you’ve noticed you’ve been spending a lot of money on eating out in the last few months, make a conscious effort to cook at home more often and check back to see how much money you’ve saved over time. 

Try to lower any fixed expenses, such as car or money loans. You can also find more affordable plans for internet and cable or various streaming services to help you save a few bucks every month and instead put that money towards your savings account. 

Unfortunately, you can’t eliminate all of your expenses. However, you can make lifestyle changes, such as canceling unused subscriptions and memberships, to help you save more every month. 

Increase Your Income

If you can’t reduce your expenses, you can increase your income. The easiest way to earn more money is to ask your boss for a raise. While this can be intimidating, it may also be necessary depending on the cost of living and your skillset. That said, you should only ask for a raise if you know you truly deserve it. Unfortunately, not everyone’s boss will give them a raise, so those individuals may have to search for other employment opportunities or work second jobs to increase their income. 

Hold Yourself Accountable

A budget is just a list of numbers; it’s up to you to hold yourself accountable and stick to it. Managing your wants can help you save money over time, so review your bank statements to see if there are any categories where you’re overspending, such as entertainment or nights out on the town. Holding yourself accountable by ensuring you continue to review your budget, bills, and expenses every month will prevent unnecessary overspending while ensuring you can still put some of your paycheck toward saving for the future. 

About the Guest Author: Megan Isola

Megan Isola holds a Bachelor of Science in Hospitality and a minor in Business Marketing from Cal State University Chico. She enjoys going to concerts, trying new restaurants, and hanging out with friends. 

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